Earlier this month, Bank of America (BofA) analysts predicted that both Brent and West Texas Intermediate (WTI) crude oil prices could reach $95 per barrel this summer. While that probably wouldn’t be good for your wallet due to the higher prices at the pump, it could be good for your investment portfolio.
Overall, the investment bank increased its full-year average price forecast for Brent to $86 per barrel, up from a previous forecast of $80 per barrel. Meanwhile, it raised its average WTI forecast for 2024 from $75 per barrel to $81 per barrel.
BofA raised its oil price forecast for several reasons, including increased geopolitical tensions between Western countries and the oil-producing countries of Russia, Iran and Venezuela. The bank also sees oil demand exceeding supply due to production cuts by OPEC+, slowing US shale growth and improving global economic prospects.
So how can investors play on higher oil prices? Let’s look at three stocks that will benefit, from an oil giant to a small independent producer.
ExxonMobil
ExxonMobil (NYSE:XOM) may be one of the largest energy companies in the world, but it has solid growth prospects ahead. The two largest growth areas come from Guyana and the Permian Basin, which together saw production growth of 18% in 2023.
His most valuable asset is his 45% stake in the Stabroek block an offshore oil project that it operates off the coast of the South American country Guyana. The asset is productive, with an estimated 11 billion or more barrels of reserves, and has very low breakevens of an estimated $28 per barrel. Exxon just announced it will move forward with a new Stabroek project near Guyana, which will add 250,000 barrels of oil per day capacity.
The company is also ramping up production in the Permian Basin, where it plans to grow production by about 13% per year in the coming years. It expects to reach 1 million barrels of production from the basin by the end of 2027. Overall, it expects production to increase from 3.8 million oil equivalent barrels per day in 2023 to about 4.2 million oil equivalent barrels per day in 2027. .
ExxonMobil is methodically increasing production, and with oil prices likely to rise, the company is in a strong position to benefit.
Western petroleum
Western petroleum (NYSE:OXY) is an international oil company with a strong presence in the Permian Basin. Once the $12 billion acquisition of CrownRock is completed, nearly 48% of production will come from the basin.
Despite expanding its Permian assets with the pending acquisition of CrownRock, the company expects relatively flat growth from the Basin this year, moving instead to production growth primarily from the Rockies and Al Hosn in the UAE come.
However, the biggest benefit of higher oil prices for Occidental is that it will allow the company to deleverage its balance sheet more quickly. The company will have a debt burden of about $28.5 billion after the CrownRock deal closes.
In 2023, the company generated $5.5 billion in free cash flow. But for every $1 per barrel change in the price of WTI, Occidental sees an increase in annual cash flow of about $210 million. It also sees a $20 million increase in annual cash flows due to a $1 per barrel move in the price of Brent oil. If oil prices average more than $10 per barrel higher in 2024 than in 2023, there could be a $2.3 billion increase in free cash flow. CrownRock was also expected to add $1 billion in annual cash flow at $70 per barrel WTI. So Occidental should be able to pay off its debt fairly quickly if oil prices remain high.
Baytex
Equivalent to Western, Baytex (NYSE: BTE) is another deleveraging story that will benefit greatly from higher oil prices. After acquiring Ranger Oil, the company also wants to reduce its net debt, which stood at 2.5 billion Canadian dollars ($1.9 billion) at the end of 2023.
Baytex forecast free cash flow of CA$530 million ($388 million) for 2024, but that was based on a WTI price of $73 per barrel. BofA’s forecast of $81 per barrel would see the company generate approximately CA$875 ($635 million) in free cash flow, based on the oil price sensitivities the company provided. That’s a whopping 65% improvement over expectations and will allow Baytex to reduce its debt faster and also buy back shares.
The company will grow production 1% to 2% this year, and should also benefit from a narrowing of the spread between Canadian heavy oil and WTI.
Three stocks to buy
All three oil stocks will benefit from high oil prices. ExxonMobil is a market leader with solid growth and low-cost production. Occidental and Baytex, meanwhile, both have options to reduce their debt and could accelerate this with higher oil prices. Although Baytex is the smallest of the bunch, it is particularly sensitive to oil price movements and could have the most upside in an oil bull market. However, it carries more risk if oil prices also fall.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends Baytex Energy and Occidental Petroleum. The Motley Fool has a disclosure policy.
Bank of America just forecast $95 oil. 3 Oil Stocks to Buy Now was originally published by The Motley Fool
